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Recent changes mean that you can choose how to take your money from your pension. For example, you could take unlimited lump sums as and when you like, or even take the whole amount if you wish. As previously, you can take up to 25% of your pension pot tax-free, and a taxable income from the rest, which is added to other income for tax purposes. So how do you decide? Here are some of the key questions you may have.

How long will my money last?

We are all living longer, on average a 65 year old in good health is expected to live for 24 years after retirement and it is thought that 25% of us will live to see our 95th birthday. Retirement savings will have to last for a long time, possibly 30 years or more. Leaving your money invested for longer could make a big difference to your lifestyle along your retirement journey.

How much State Pension will I get?

The amount of state pension is not the same for everyone and it depends on your employment history and when you were born. Remember the State Pension is designed to cover only a very basic standard of living without any luxuries.

What about savings I have?

If you have bank saving accounts, premium bonds or ISAs, it may be better for you to take money from these first before drawing from your pension plan. If you own your home you might think about downsizing or renting it out to fund your retirement.

What are my future financial needs?

Consider all of your living expenses, like household bills and family costs, and how these may change over the coming years. Remember to budget for holidays, transport and house repairs. Also factor in the fact that your financial needs are likely to reduce as you get older and become less active, but keep in mind that in your later years costs of long term care may be required.

How can I minimise my tax bill?

Consider your personal tax allowances and plan to take your retirement savings in a way which makes the most use of your personal tax allowance so you don’t have to pay tax unnecessarily.

Should I buy an annuity?

An annuity is a promise by an insurance company to pay you an income for the rest of your life. You should check the terms of the annuity before you commit as they cannot usually be changed afterwards. It is worth shopping around different insurance companies before you buy as prices can vary.

Will I lose any of my welfare benefits?

If you are receiving state benefits or Tax Credits then taking your retirement savings could impact on the level of those benefits. This is a complicated area and expected to change in the near future. Make sure you understand how your state benefits, tax credits or long term care needs would be affected before deciding to access your retirement benefits.

What happens when I die?

If you die before age 75, any money left in your pension plan will be paid to your survivors free of any tax. If you die after 75, money paid to your survivors may be subject to tax depending on their circumstances. Retirement savings which remain in pension plans are not normally counted for inheritance tax purposes. If you have purchased an annuity, benefits payable after your death will depend on the insurance contract.

The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.

Need more help?

This feature aims to give some informal hints and tips. McPhersons Financial Solutions are offering businesses free advice so get in touch now to arrange your meeting. Simply email Peter Watters p.watters@mcphersons.co.uk or call our Head Office on 01424 730000 for a free consultation at McPhersons’ London, Bexhill or Hastings offices. www.mcphersonsfs.co.uk

Every month the directors at Mcphersons share some useful financial tips especially for Business in Hastings readers.  This month Ashley Gill looks at  how you could retire at 55.

  • Use you share of the £35 billion the taxman gives pension saversholidays

When you put money in a personal pension the taxman also contributes. Imagine you pay in £1,000. The taxman automatically adds another £250, so your pension pot receives £1,250. If you pay 40% or 45% rate tax, as a higher rate taxpayer you get even more.

  • Start a pension

It is thought that as many as four in ten British adults don’t have a pension. If you wish to retire at 65 on 65% of your salary, divide your age when you start your pension savings by two and contribute this as a percentage of your earnings. For example, if you’re 25 you should aim to save 12.5% of earnings.

  • If your employer offers you a pension at work, take it!

Over the coming years all UK companies will have to offer a pension to their employees. If you opt out, you could be missing out on ‘free money’ from your employer.

  • Check where your pension is invested

Half of the UK population have no idea where their pension fund is invested, but it is important to know because you could be missing good returns if you didn’t.

  • Make small regular increases

Take a person aged 30 contributing £150 net to his pension every month. If every year that person increases that amount by 5% or £7.50 a month for the first year, at age 65 he could find himself with an extra £190,642 in his pension, assuming basic tax relief and that the fund grows 4% a year after charges.

  • Trace old pensions

If you recall joining more than one pension but don’t have the details to hand, you can trace them for free with the Pension Tracing Service.

  • Approaching retirement?

Retirement rules are changing as of April 2015. If you are 55 or over, you will have a lot more freedom and flexibility on how you can draw your private pensions. Choosing how to draw your pension is one of the most important financial decisions you will have to make. Remember you may need it for 20, 30 or even 40 years. So ensure you find out about the new rules and opportunities available by speaking to McPhersons Financial Solutions on 01424 730000.

And remember, the value of pension and the income they produce can fall as well as rise. You may get back less than you invested.

 

 

 

 

 

 

 

 

 

Every month, Peter Watters, ACA, shares some useful financial tips especially for Business in Hastings readers. This month, he looks at Saving for Retirement with our Financial Solutions expert, Daron Beacroft. With major changes being made to Britain’s pension system, we all should be encouraged to save in a tax efficient pension.

20s Once you begin work, retirement is a distant thought. Other priorities tend to take precedence, like saving a deposit for a first home, paying down debts from student days or simply enjoying life.relaxed-workewr

The biggest influence on a comfortable retirement is the capacity to generate earnings. By starting a regular savings plan early, even if you can only spare small amounts, the returns will be much bigger. om student days or simply enjoying life.

Your earnings are generally low during this period but diverting the small amount left at the end of each month into a pension is likely to yield less than saving into an ISA, where the £15,000 tax-free annual allowance (from July 1 2014) will be more than sufficient.

The exception is your company’s pension scheme. Employers will pay on your behalf, for example, you might pay 5 per cent and the company 5 per cent.

30s During this period your earnings should start to increase, but you could have higher costs to possibly meet like getting married, starting a family or buying a first home.

You may need to create an ‘emergency fund’ to cover unexpected issues such as redundancy; a fund worth six months’ expenditure is generally the rule of thumb.

New parents may want to consider life assurance, which will protect family finances if anything happens to the main income.

Repaying mortgage debt will also take a large chunk of income. If you can afford to, invest as close to the £15,000 ISA limit as possible. You should also consider joining your company pension and consider increasing contributions if possible.

Pensions can help tax planning. Families where one parent earns more than £50,000 will start to lose their entitlement to child benefit.

Contributing to a pension can reduce your taxable earnings below £50,000 and preserve this benefit for your family.

40s If you haven’t started a pension type savings plan yet, it’s not too late. With up to 27 years before you collect your state pension and potentially more afterwards. Don’t be fooled into thinking your investment time-horizon is short; investments can still continue into retirement, for good returns.

During this period you may have school fees or other commitments to consider. Try to maximise the £15,000 ISA allowance, but don’t ignore the tax relief on pensions, though, which applies at your highest marginal rate. It costs a higher-rate taxpayer only £60 to put £100 into their pension.

Consolidate pensions sitting idle with former employers into a Self-Invested Personal Pension, or “SIPP”. These plans, which give access to thousands of investments in one place, are offered at low cost by different financial companies.

50s Saving for retirement should now become serious. From age 55 you will be able to access your pension. In theory you could retire then.

In reality, most people will continue working and plan carefully, saving as much as possible for the future as other expenses cease. Plan by working out how much income you’ll need when you eventually stop work. Pensions do work as tax-planning tools after your ISA allowance is used. Consider for every £2 you earn above 100,000, you lose £1 of your tax-free personal allowance (currently £10,000). Contributing to a pension can reduce your taxable income so you retain this tax break.

Focus though on the £1.25m lifetime cap on saving. Someone aged 50 with £525,000 in a pension would push past the lifetime allowance by age 65 if the fund grew at 7 per cent a year even without additional contributions, according to pension provider Standard Life.

There is a currently a £40,000 limit on annual contributions to pensions.

60s Many people will continue working, into their sixties. With the new rules from next April, you have instant access to your entire pension fund, how and when you withdraw becomes a major decision. An annuity will guarantee a stream of income payments for life, but the cost of purchase is high.

For example, current rates pay just £6,000 a year for each £100,000 of savings. Shop around for the best rates, as they do vary between insurers and declare all health conditions to obtain the highest income.

The main alternative to an annuity is to keep your pension invested in the stock market and take income as you need it. This runs the risk of the ups and downs of the stock market.

The capital should be protected, a well-diversified set of dividend-paying funds and shares can provide a decent income, so long as you can put up with the fluctuating value of the underlying capital.

With the introduction of the new flat-rate state pension, probably in 2016, you will need 35 qualifying years of National Insurance contributions to benefit from the full £155 a week (it is possible to “buy” extra qualifying years). Check with the Pension Service on 0800 731 7898 to ensure you have the full amount.

Need more help?

This feature aims to give some informal hints and tips.  Mcphersons are offering businesses free advice so get in touch now to arrange your meeting. Simply email Peter Watters p.watters@mcphersons.co.uk  or call our Head Office on 01424 730000 for a free consultation at mcphersons’ London, Bexhill or Hastings offices. www.mcphersons.co.uk 

The value of your investment and the income from it can go down as well as up and you may not get back the original amount invested. Past performance is not a reliable indicator for future results. Please contact us for further information or if you are in any doubt as to the suitability of an investment.

Every month, Peter Watters, ACA, shares some useful financial tips especially for Business in Hastings readers. This month, he looks at Company Pension Schemes with Mcphersons Financial Solutions expert, Daron Beacroft.

Workers who believe they are too old to save in a company pension are missing out on the chance to triple their money. Automatic enrolment really is for you!

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Thousands of workers in their 50s and 60s have rejected the opportunity to join new company pension schemes because they think they are so close to retirement that the savings won’t make any difference.

However, new pension reforms mean they could effectively get as much as a 258 per cent boost to their contributions in just a few years and take out all their money tax-free.

Two years ago, firms started enrolling all workers automatically into a pension scheme. This began with the biggest firms; by 2017, all employers will have to do this.

Employees don’t have to do anything to join, they can opt out.

Once enrolled by your employer, your contributions are deducted from your payslip. Your employer contributes to your pension fund, too, and there is added tax relief from the Government.

Some people have opted out because they believed the amount they could save would be so small it would make no difference to their retirement income, but two things have changed since people made the decision to opt out: the amount of income you can earn before paying tax; and new pension rules, which allow you to take all your money in cash.

It means, in effect, that retiring workers could draw all their money out of the company pension scheme and not pay a penny of tax.

So how does it work?

A worker enrolled in an automatic company pension saves 0.8 per cent of their salary, 80p for every £100 of earnings. Their employer adds another £1. This gives a total of £1.80 on the employees’ contributions. Paying into a pension, you get back the tax you had paid on those earnings.

So, if you pay in 80p, the Government adds 20p to return the 20 per cent income, on a basic rate taxpayer. So your £1.80 is now £2.

Also, because your money is invested, it grows with the stock market. Assuming a rate of 5 per cent a year and earning £24,000 today, an increase in contributions in 2018, a  small pay rise every year and 5 per cent annual growth, at these rates,  a 55-year-old could build up a sum of £14,134 by the age of 65.

Of this, £5,479 would be their own money, £4,315 from their employer, £1,370 tax relief and £2,970 investment growth.

Amounting to a rather nice 258 per cent increase on the amount they put in.

A 60-year-old could save £5,383. That’s £2,556 from their own money, £2,181 from their employer, £639 tax relief and £631 investment growth, a 210 per cent boost.

When you draw money from a pension, you can take 25 per cent tax-free, but the rest is taxed at your normal rate. But everyone gets £10,500 a year before paying tax from April 2015.

The current state pension of £113.10 is worth about £5,888 a year, while the new flat-rate state pension will be worth about £155 a week when it is introduced in 2016, which makes that £8,060 a year. Meaning that even with the new state pension, you can have £2,440 a year extra income tax free.

Every three years, workers who initially opted out of automatic pensions are put back into the scheme. 

Need more help?

This feature aims to give some informal hints and tips.  Mcphersons are offering businesses free advice so get in touch now to arrange your meeting. Simply email Peter Watters p.watters@mcphersons.co.uk  or call our Head Office on 01424 730000 for a free consultation at mcphersons’ London, Bexhill or Hastings offices. www.mcphersons.co.uk